Three Ways to Protect “Loans” From Family and Friends in Divorce Proceedings
How can I protect money my parents or friends loaned me (actually “us” legally speaking) from being divided with my spouse in the divorce?
A common scenario that unfolds in a divorce is a claim by the husband or wife that certain money in the marital estate and asset was loaned the divorcing couple and should be repaid. In most cases, there is not a perfected loan (document) recognized under Indiana law that is automatically given protection in divorce proceedings because the divorce court cannot undo a proper, binding loan (or real estate mortgage).
Where the amount of this informal loan is significant, such as for the down payment for a house for the now-divorcing couple), a heated dispute may arise about whether the money was a gift to the parties (and the divorce court should divide it between them as is normally the case) or a loan to be accounted for in the division of assets on divorce. This blog explores three legal options for protecting an informal loan--that was really intended as a loan—in divorce proceedings.
The first option--the most practical and cost-effective in most cases--is to provide the loan document in trial evidence or have the family member, friend or person who loaned the money testify at the divorce trial about their loan, as they can be subpoenaed as a witness. While this “loan” is in the marital pot subject to the court’s ability to divide, the trial court can deviate from the presumptive equal division to allow the party to obtain a bigger share of the marital pot to repay the loan. The key here is this must be presented in the evidence by admissible documents or testimony. Your testimony alone is likely to be viewed as slanted to your position and this money viewed as a gift by the divorce court and divided equally.
Where larger sums of money are involved, your right to a divorce trial (known as a final hearing) and testimony and admission of documents about a loan may not be sufficient to protect you or the third party. In these cases, the trial rules, which are the rules that facilitate civil litigation in Indiana, provide a second potential option that may allow you to seek this person (or entity) joined as a party to the divorce case to advocate their position about the loan with you.
These rules are somewhat technical in nature, but in simple terms, they allow some third parties to be joined in a discretionary way (the court decides) and others allow joined to a case as a matter of right to protect the interests attributable to them—their loan to you. The key takeaway is the person to whom you owe money to, may be able to become a party to the litigation to further protect their interests (and yours as well so you are not “stuck” with at least a moral obligation to repay the loaned sum after divorce). This person, now a party, is listed on your caption and attends the divorce final to advocate to protect their interests.
The third option is rare, but still an option in the wide array of tools available to do justice. This is intervention. In these cases, the third party, typically a parent, has loaned the parties a substantial amount of money or placed one of their assets in the names of their child, now the divorcing husband or wife. In these cases, the third-party acts on their own and seeks to get into (e.g., intervene) in the divorce case to assert their claim against the marital estate.
Normally, the third-party (such as a parent or friend) files a petition to intervene in the divorce proceedings; the court then conducts an evidentiary hearing to determine if they should be allowed to intervene. During this hearing, the court receives evidence about any loan and if their financial position can be protected without intervention. This third party may be “hostile” to both parties, believing they were taken advantage of by loaning money that will now be divvied up between the divorcing parties without their own intervention to protect their loan.
Ultimately, divorcing parties, as well as third parties who have informally loaned money now intertwined with the divorce proceedings, have several remedies. These “loans” are otherwise presumed gifts and divided up between the divorcing parties, normally equally under the Divorce Act. Thus, the law is responsive to the unique needs of any case if the litigants and their counsel consider and properly use the tools available to them.
This is how you protect informal loans made to the parties on divorce. This blog post was written by attorneys at Ciyou & Dixon, P.C. who handle divorce cases of all types and complexities throughout all Indiana counties. This blog is written to provide general educational information. It is not intended as legal advice, nor a solicitation for services. It is an advertisement.